Question

An accounting professional requires at least two skill sets. The first is to be technically competent. Knowing how to capture, manage, and report information is a necessary skill. Second, the ability to assess manager and employee actions and biases for accounting analysis is another skill. For instance, knowing how a person is compensated helps anticipate information biases. Draw on these skills and write a one-half page memo to the financial officer on the following practice of allocating overhead.

Background: Assume that your company sells portable housing to both general contractors and the government. It sells jobs to contractors on a bid basis. A contractor asks for three bids from different manufacturers. The combination of low bid and high quality wins the job. However, jobs sold to the government are bid on a cost-plus basis. This means price is determined by adding all costs plus a profit based on cost at a specified percent, such as 10%. You observe that the amount of overhead allocated to government jobs is higher than that allocated to contract jobs. These allocations concern you and motivate your memo.

Answer 1

Answer:-

Approach of ingestion costing applies overheads on volume based cost drivers, for example, machine hours or work hours. Yet, with headway in innovation and present day fabricating condition requires an arrangement of costing in which overhead should be connected on movement based cost drivers this implies overheads are connected to the items based on the utilization of help exercises by every item.

• This could be made clearer with the assistance of this case.

Product	Contract Jobs	Govt. Jobs
Material cost	2,000	6,000
Direct labor	5,000	4,000
Overhead per	3,000	7,000
Total cost	10,000	17,000
Profit	1,000	1,700
Selling Price	11,000	18,700
Total overheads	10,000
Labor hours	2,000

Contact Job required 3000 hours and Govt. Occupation required 7000 hours,

In absorption costing

Overhead absorption rate = 10,000 / 10,000

= 1 per hour

• Proceed with a similar case for movement based costing

Setup cost	3,000
Number of setups	4
Machine cost	7,000
Machine hours	3,000

Contact Jobs require 3 setups and the Govt. Occupation requires ,

1 setup :-

The two occupations require same number of machine hours.

Over head recovery rate = overheads /activity

Setup cost = 3,000 / 4

Setup cost = 750 each setup

Machine cost = 7,000/3,000

Machine cost = 2.333 per hour

Product	Contact Jobs	Govt. Jobs
Material cost	2,000	6,000
Direct labor	5,000	4,000
Setup cost	2,250	750
Machine cost	3,500	3,500
Total cost	12,750	14,250
Profit	1,275	1,425
Selling Price 14025	14,025	15,675

From the above investigation it is certain that as the asset use the two occupations are unique in relation to each other thus the offering cost under two methodologies are extraordinary.

Prior under the customary approach the offering cost of Govt. work is on higher side which could have caused an issue in making an aggressive offer. What's more, the cost of assets which was used by other employment was being charged to the activity which was not using the assets to such an extent.